Social Security – The Truth About the Early Retirement Penalty

How many times have you heard that it’s better to wait before taking your Social Security? Well, if you are eligible for Social Security, in good health and don’t need the money to live, I do recommend that you wait until your full retirement age or later before drawing Social Security.

Part I The Not So Magical Math of an Early Retirement 

Hint: It’s called a penalty for a reason.

 Here it is in black and white. Its copied right from the Social Security documentation fine print and presented here for your reading pleasure. This information is also really boring stuff! First I’m going to let you read it, then I’m going to translate it into the not so magical math of the financial cost of an early Social Security retirement. 

Boring Stuff AKA Not so Fine Print about the Penalty for Early Retirement  

The minimum age at which you can retire and receive Social Security retirement benefits is now 62. If you retire at age 62, you will be eligible for reduced retirement benefits based on a percentage of your primary insurance amount (PIA) entitlement, if you are fully insured. Your retirement benefit will be reduced by 5/9ths of 1 percent (or.55556 percent) for every month between your retirement date and normal retirement age, up to 36 months, then by 5/12ths of 1 percent thereafter. 

Translation of Your Social Security Early Retirement Math 

If you qualify for Social Security benefits, you will pay a penalty forever once you begin to take your Social Security benefits early. There are no ‘do-overs’. –The ‘pay back’ loop hole has been closed. 

The chart below breaks down the math and penalties for early retirement for Social Security. Read ‘em and weep… 

Chart data is for example only. The Full Monthly Retirement benefit shown may or may not show your actual benefit! Check with SSA.gov for more information. 

Actual Retire-ment Age Social Security Normal Retire-ment Age Full Mo. Retire-ment Benefit Actual Benefit Amount at age 62 Dollar Amount per Mo. Differ-ence % Amount per Mo. Differ-ence Annual Dollar Differ-encefor life
62 66 $1200 $900 -$300 -25% $3600
62 67 $1200 $840 -$360 -30% $4320

  [1] At age 62 with a retirement age of 66, your penalty is a permanent reduction of your monthly benefit by 25%. (That is: .55556 x 36 months for ages 62-65 and .41667 x 12 for the months from ages 65 to 66). For every dollar you would earn by waiting until full retirement age at 66, you get .75 cents. So, in dollar terms, what would have been an annual salary of $14,400 is reduced to $10,800 per year, for life.

[2] At age 62 with a retirement age of 67, your penalty is a permanent reduction of your monthly benefit by 30%. (That is: .55556 x 36 months for ages 62-65 and .41667 x 24 for the months from ages 65 to 67). For every dollar you would earn by waiting until full retirement age at 67, you get .70 cents. So, in dollar terms, what would have been an annual salary of $14,400 is reduced to $10,080 per year, for life. 

Jane Nowak is a CERTIFIED FINANCIAL PLANNER™ specializes in AT&T Retirement Plans, Women’s Retirement and Financial Planning for Women. Located in the Smyrna, Marietta, Vinings area of Atlanta, GA, Jane’s goal is to educate and empower her clients to take control of their daily finances so they can fully fund their retirement dreams and needs. Jane has recently had articles quoted and published on-line at the NASDAQ, Yahoo Finance, Womenetics.com, Smart Money Chicks, Fox Business News, CreditCards.com, U.S. News and World Report and Financial Planning Association (FPA) websites.

Securities offered through Triad Advisors, Inc. Member, FINRA/SIPC

       

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12 Responses to Social Security – The Truth About the Early Retirement Penalty

  1. […] those of you who are divorced, you may have some Social Security eligibility options that you don’t even know about. Everyone’s case is different. But, in this […]

  2. John says:

    Jane,

    Why dosen’t anyone show how many years it would take to recover the $ you dont get in the four years if you take early retirement?
    In the example above, you would collect $43,200 from 62 to 66. At $300 per month, it would take 12 years to get that money back, or, you would break even at 78 years old. On top of that, the money you receive from 62 to 66 is worth more adusted for inflation than the $300/mo you get years later.

    • John, Thanks for your comment. Age 78 is currently the break even point for many Social Security (SS) recipients who choose to receive their benefits at age 62. So, because SS offers a cost of living adjustment, I believe that the decision of when to take your SS hinges on several factors including immediate need for income, health situation, longevity potential and the break even math.
      If you don’t need the income, have good health and have a reasonable expectation of living beyond your break even point of age 78, definitely do not take your Social Security benefits early.
      The greatest challenge many of us will face in retirement is increased longevity.
      Since none of us have a crystal ball and assumptions can be murky at best, I still believe that waiting for benefits can be a very good financial decision.

  3. Your post, “Social Security – The Truth About the Early Retirement Penalty
    Jane Nowak, CFP – MoneyGal2020 – Financial Fanatic” ended up being definitely worth writing a comment down here in the comment section!
    Just simply desired to point out you truly did a
    remarkable work. Thanks for the post ,Rhea

  4. PAUL C. GALVIN says:

    THANK YOU ,JANE, CLEAR AND STRAIGHT FORWARD. I THOUGHT THAT ONE COULD STILL REPAY S.S. FOR FIRST YEAR OF RETIREMENT TAKEN ,TO RESET THE CLOCK.BUT ONLY ONCE.WHAT IS THE % PENALTY DIFF. FROM 62 TO 63 ? I FILED TODAY FOR AT 62 ,EFFECTIVE MAY 18,2013. AM I LOCKED IN OR CAN CHANGES IN LAW , MAKE ME WAIT ? IS S.S. TAXED AS INVESTMENT INCOME @15% ??. DO YOU TAKE CLIENTS IN TX ? THANK YOU AGAIN FOR YOUR GENEROSITY OF TIME AND KNOWLEDGE,PAUL C.

    • Hi Paul,
      Lots of good questions. You are right, you can take benefits 1x, stop and repay all benefits received within a specified period of time. Regarding your specific scenarios, try the online social security calculator @ SSA.gov. Call your Social Security office for your ‘locked in’ question. Speak with CPA regarding taxation. I’m not licenced in TX.

  5. PAUL C. GALVIN says:

    DOES INCOME FROM A RENTAL PROPERTY CAUSE S.S. TO DEDUCT $ FOR INCOME EARNED OVER $14640 ? IF I AM 62 ? AND TAKING EARLY RETIREMENT ??? THANK YOU !

    • Hi Paul,
      From all I’ve read rental income does not count as earned income -reference section 806 of the Social Security code. However, because I do not know your specific situation, you must consult your Social Security office and/or a trusted local professional who knows your specific personal situation.

  6. Chris says:

    Oh that life was as simple as this calculation would imply. However, if you’ve been prudent and have investment funds that you’d have to withdraw from to live on, then you need to factor in that each withdrawal also loses you the compounded gain you would have received from the funds withdrawn. SS doesn’t compound gains.

    Also if you have an annuity then you need to factor in the potential that it could cause 50-85% of your SS would be considered taxable income. The taxable calculation is a real bear involving two tier thresholds, and even potentially adding in income that is normally non-taxed.

    If you’ve ever been married, don’t forget to check out the possibility of your spousal benefit and how that could allow you to increase your monthly benefits. If 50% of your spouse’s full benefit is larger than your full benefit then also consider having them file and suspend so they can grow their SS while you step up to an increased monthly payment.

    Or, just use a dart board – I’m considering that approach before I lose all the hair I’m pulling out trying to figure this out.

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